The Reserve Bank has blamed conflicts of interest among merchant bankers as one of the prime reasons for faulty project appraisals that have led to the piling up of huge non-performing assets in the system which has crossed 10 per cent or over Rs 10 trillion as of the September quarter.
"The impairment crisis in the banks has also highlighted certain basic deficiencies with regard to the appraisal of long-term projects with a significant gestation time," the central bank said in the Financial Stability Report (FSR) for the first half of the current financial year.
"A significant part of such projects undertaken were consortium lending with appraisals being carried out by professional merchant bankers with built-in conflicts of interest (since they are paid by the borrowers)," the half-yearly report released late last evening said.
It can be noted that since the public sector banks dominate the credit space, lead by the market leader SBI, lenders have been engaging SBI Caps, the merchant banking arm of SBI, for both loan appraisals as well as loan restructuring and even project appraisals.
With a gross non-performing assets ratio which increased by 19.3 per cent, the corporate sector contributed highest to dud assets among all segments and was primarily led by metals, power. engineering, infrastructure and construction sectors, which involve project appraisals.
The GNPAs in basic metals and metal products were 44.5 per cent, that of construction stood at 26.7 per cent, infrastructure (19.6 per cent) and engineering GNPAs zoomed to 31 per cent, the report said.
The report has projected GNPAs to jump to 10.8 per cent by the March quarter and to 11.1 per cent by September 2018 and blamed the spike to primarily to private sector banks which had been under-reporting their dud loans. In the September quarter, the GNPAs had spike to 10.2 per cent from 9.6 per cent six months earlier.
"The banking stability indicator (BSI) shows that the risks remain at an elevated level weighed down by further asset quality deterioration," the FSR noted.
Overall, the stressed assets, including restructured loans and dud loans increased marginally to 12.2 per cent during the same period from 12.1 per cent. The state-run banks' GNPA shot by 100 bps to 13.5 per cent while the same for their private sector peers jumped to 3.80 per cent.
The report, significantly noted that private sector lenders, considered more prudent are the ones reporting the most stress reporting a whopping 40.8 per cent spike in their GNPAs as against 17 per cent by the state-run ones whose lazy banking has been blamed primarily for the mess in the system.
It can be noted that all the top private sector lenders, including ICICI Bank, Axis Bank and Yes Bank, and even HDFC Bank, have been found to have under-reported their dud assets in the recent RBI" supervision, results of which were recognised over the first two quarters of the fiscal.
The FSR said public-private partnership (PPP) projects involving high leverage were also undertaken.
"The exact implications of such risky projects implemented through the special purpose vehicle (SPV) route were sometimes not clear to bankers," it said.
The RBI said PPP contracts of long-term duration are complex due to the involvement of multiple stakeholders and there is a "need to align their objectives for mutual benefit."
"Successful implementation of PPP projects calls for more due diligence by all stakeholders, including public sector contracting agencies, private concessionaires, and bankers," it added.